The Monetary Council of the Hungarian National Bank (MNB) kept the base interest rate on 1.35% at its regular meeting this month, as expected by analysts. However, the prime rate no longer applies for two-week deposits at the National Bank, only three-month deposits.
The press release that accompanied the decision speaks of unchanged monetary conditions, but commentators point out that the Monetary Council practically carried out a rate increase. Since while MNB is redirecting the deposits from a two-week construction to bonds with a three-month term, and the formerly unlimited amount of short-term deposits is now limited to a maximum of HUF 1,000 billion, the three-month term treasury bonds have been traded at the lowest value ever, at 0.38%, at the recent auction by the Centre of External Debt Management (ÁKK).
Thus when we compare the yield of the treasury bonds to the base interest rate, we can see that we hardly even have a surplus of 1%. Analysts agreed that the latest rate decision was not surprising but they also emphasised that the two-week deposits have been released from the binding with the base rate. The experts have apparently honoured the efforts of the National Bank to radically decrease the ratio of Hungarian state bonds owned by foreign investors.
As long as inflation remains low while the economy is losing momentum, the discrepancy between the newly introduced base rate and the rates formed on the open market will not cause any problems, the commentators believe. The current concerns about the economic outlook in China leave their mark on global growth expectations – so we can expect that the low interest rate environment will remain prominent for quite a while yet.
Even if the US Federal Reserve starts raising interest rates, there will be no dominant effect felt in this cycle yet; in the meantime the European Central Bank is still pushing for stricter monetary policy.
Recently it looked like the Central-Eastern European zone was reacting in a completely neutral way: while many emerging markets in Asia and America are under pressure, the national currencies in the aforementioned region remained largely stable, and the yields on the government bond market increased further on.
In case the European Central Bank decides to disperse even more liquidity in Frankfurt, the MNB will ultimately be able to introduce even further rate decreases – without considering the fact that in the summer 1.35% still sounded like the lowest score possible.